US regulator reports growing number of flawed audits

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US regulators have seen a rise in the number of flawed audits conducted by global accounting firms, pointing to high employee turnover and the difficulties of hybrid work, according to data released on Monday night.

The Public Company Accounting Oversight Board said its inspectors found deficiencies in 30 percent of audits conducted by global network firms — Deloitte, PwC, KPMG and EY, plus Grant Thornton and BDO — of US businesses last year. This was up from 21 percent of audits inspected in 2021.

There was an even larger increase in failures in the work of the companies’ non-US businesses, where the failure rate increased from 17 percent to 31 percent.

“Although we do not conduct analysis to determine the root cause of deficiencies identified by our inspectors, many companies do,” the PCAOB said in a report. “Some firms have indicated that this decline in audit quality may be partly due to higher-than-usual staff turnover, the use of less experienced staff in general, and the ongoing impact of COVID-19 and related remote work.”

The PCAOB has the power to oversee the audit of any company listed in the US, regardless of where its auditor is located. It said it had reviewed 710 audits last year as it ramped up its work to enforce US standards.

The Financial Times reported last week that EY expected a 38 percent reduction rate in inspections of work done by its non-US businesses, down from 21 percent in 2021. The PCAOB report suggested the increase would be slightly higher than average, although EY said its figures were preliminary and would only be confirmed after the PCAOB inspection report was finalized.

In Monday’s report, the PCAOB said its inspectors are also increasingly finding lapses in the work of smaller audit firms, whose clients tend to be smaller companies and typically have higher attrition rates than global firms. More than half of audits inspected at these firms failed to meet US standards in 2022, although the increase was not as pronounced as at global firms.

Overall, nearly 40 percent of audits it reviewed in 2022 had one or more deficiencies, the PCAOB said, in which the audit firm failed to obtain sufficient appropriate evidence to support its audit opinion. The total figure is 6 percentage points higher than 2021, which was five points higher than the reduction rate in 2020.